Question

NPV?, with rankings???Botany? Bay, Inc., a maker of casual? clothing, is considering four projects shown in the following? table. Because of past financial? difficulties, the company has a high cost of capital at 14.1 %. a.??Calculate the NPV of each? project, using a cost of capital of 14.1 %. b.??Rank acceptable projects by NPV. c.??Calculate the IRR of each project and use it to determine the highest cost of capital at which all of the projects would be acceptable. nitial investment ?(CF 0?)Initial investment A-$50,000 B-$100,300 C-$79,200 D-$179,500 Year Cash inflows Year 1 $20,400 $36,100 $19,100 $100,300 Year 2 $20,400 $51,900 $39,100 $80,400 Year 3 $20,400 $50,900 $59,700 $60,000

Answer 1

a.

	Project A	Project B	Project C	Project D
NPV	$          (2,718.06)	$      5,470.11	$    7,763.11	$ 10,554.05

Computation of NPV of Projects:

Year	Cash Flow (A)	Cash Flow (B)	Cash Flow (C)	Cash Flow (D)	PV Factor Calculation	PV Factor @14.1 % (F)	PV (= A x F)	PV (= B x F)	PV (= C x F)	PV (= D x F)
0	$         (50,000)	$          (100,300)	$        (79,200)	$      (179,500)	1/(1.141)^0	1	$            (50,000)	$           (100,300)	$       (79,200)	$ (179,500)
1	$            20,400	$              36,100	$           19,100	$        100,300	1/(1.141)^1	0.876424189	$         17,879.05	$          31,638.91	$    16,739.70	$ 87,905.35
2	$            20,400	$              51,900	$           39,100	$          80,400	1/(1.141)^2	0.76811936	$         15,669.63	$          39,865.39	$    30,033.47	$ 61,756.80
3	$            20,400	$              50,900	$           59,700	$          60,000	1/(1.141)^3	0.673198387	$         13,733.25	$          34,265.80	$    40,189.94	$ 40,391.90
						NPV	$         (2,718.06)	$            5,470.11	$      7,763.11	$ 10,554.05

b.

Rank of projects based on NPV:

	Project A	Project B	Project C	Project D
Rank	IV	III	II	I

c.

Computation of IRR of Projects:

1	A	B	C	D	E
2	Year	Project A	Project B	Project C	Project D
3		Cash Flow	Cash Flow	Cash Flow	Cash Flow
4	0	$         (50,000)	$          (100,300)	$        (79,200)	$      (179,500)
5	1	$            20,400	$              36,100	$           19,100	$        100,300
6	2	$            20,400	$              51,900	$           39,100	$          80,400
7	3	$            20,400	$              50,900	$           59,700	$          60,000
8	IRR	10.83%	17.14%	18.93%	17.91%

Excel formula for IRR of Project A is “=IRR(B4:B7)”

Excel formula for IRR of Project B is “=IRR(C4:C7)”

Excel formula for IRR of Project A is “=IRR(D4:D7)”

Excel formula for IRR of Project A is “=IRR(E4:E7)”

Highest cost of capital is 10.83 % at which all the projects would be acceptable.